Spanish property woes highlight security of French system

Although Spain is still the number one choice for British overseas property buyers - ahead of France - recent reports in the Daily Telegraph and elsewhere continue to highlight the many uncertainties surrounding property purchase there, in comparison with France's highlys secure system of property buying and selling.

Headlines such as 'Britons lose millions on the Costa homes that never existed' or 'Nearly 400 Britons lost £43 million in property deal' appear almost daily in the property columns of the daily and Sunday newspapers. Among the most recent scandals has been the failure of some regional Spanish banks to provide the financial guarantees (against deposits paid) which are required under Spanish law 57/1968 designed 'to protect the funds paid by the buyer into a special account and ensure they are used solely for the purpose of building the property'.

Speaking of a recent ruling by a provincial court in Cantabria, Charels Svoboda - head of an action group in Valencia - noted "While this is an improvement, and it does make me hopeful, it is important to remember that half of the Spanish banks are in financial trouble and many of the developers have gone out of business or simply disappeared - so where is the money going to come from to pay them back?"

According to recent figures there are some 683,000 new-build properties in Spain seeking buyers, plus an estimated 700,000 homes for sale by their owners, according to consultancy RR de Acuna. Several Spanish banks, who have repossessed properties from owners unable to keep up repayments, are now trying to offload them at 50% of their original price. The same report notes that out of 60,000 property companies, some 23,600 have gone bust, owing 137 billion euros to the banks.

Could this happen in France? The answer is a resounding No! In the case of off-plan developments, a minimum of 50% of the proposed properties (such as apartments and villas) have to be sold before work can begin. Purchasers then pay a small deposit and a series of stage payments only when building work progresses - foundations, first floor, roof etc - which are verified and authorised by independent lawyers ('notaires') in charge of the transaction. It is rare for a building company, many of whom are large multi-nationals, to run out of funds and for work to cease.

Because of its system of land registry, existing properties and their ownership can be verified by consulting the 'plan cadastre' on-line or at the local Mairie. Part of the duties of the Notaire handling the transaction is to ensure that the property exists and that the owner/vendor has has true title. Any additions or alterations can also be checked to make sure the appropriate planning permission was obtained. Building work undertaken by correcntly registered French artisans will be covered by insurance guarantees of up to 10 years.

Buyers should exercise reasonable care particularly when purchasing new-buildss or off-plan property, either for occupation or investment, and as a minimum personally visit the site of the proposed development and samples of recent properties built by the constructor.

Sources: Sean O'Hare, Daily Telegraph 23 December 2010; Graham Norwood, The Observer, 26 December 2010.

Auto-entrepreneurs - shock tax, resolution!

Many people opting for the comparatively new French self-employment regime (known as 'auto-entrepreneur') suffered a nasty shock this autumn when they received huge bills for a new local tax (CFE*) which replaces the old 'taxe professionnelle' levied on all commercial and professional enterprises, including those run from home. This despite the fact that many of the newly created enterprises had little or even a nil turnover, and had relied on the French government's promise (when the scheme was launched in January 2009) of 'no turnover, no tax' - including exoneration from the 'taxe professionnelle' or its equivalent for the first three years of operation.

The problem, as is often the case, lay in the small print, in this case buried within the auto-entrepreneur registration form, which basically offered two distinct options for paying income tax and social security contributions. Both of these are based on a fixed percentage of revenue - 13% in the case of 'commerce' (basically businesses that buy and sell) and around 23% for services and professions. Of these amounts the majority comprises social security contributions and the remainder (1% - 2%) income tax.

The registration form offered two methods of payment of the tax element, either by three-monthly declarations (along with the social security payments) or at the end of the tax year, together with any other income tax. The latter option appeared attractive to those on very low incomes or a pension, who might end up paying no income tax at all. (For a single person, earnings up to nearly 10,000 euros do not attract tax, and for a couple the amount is around 15,000 euros).

What many signatories missed when completing the form was the provision that the exemption from 'taxe professionnelle' - replaced in 2010 by the new CFE - only applied to those electing for the system of three-monthly payments - known as 'prélèvement forfaitaire libératoire' - a term not easily understood by the average French person, let alone an English speaker resident in France. Those that had opted for the once-off annual income tax payment were as a result suddenly faced with a huge CFE bill, often when they had not generated any income from their newly created auto-enterprise.

Further anomalies arise as the former 'taxe professionnelle' and its new replacement the CFE are calculated on notional values of property owned by local businesses, whereas many auto-entrepreneurs work from home and already pay 'taxe habitation' and 'taxe foncière' - personal taxes applied to domestic properties and their owners/occupiers! Many auto-entrepreneurs also point out that they do not actually work at home but at their clients' base (such as those offering services delivered in their clients' home or business premises) or at most use a few square metres in their living room, occupied by a computer.

Fortunately after vigorous protest and a lot of adverse publicity, the government has amended the law and on 6 December, as part of the budget for 2012, announced that all auto-entrepreneurs would be free of the new tax, during the early years of startup.. Anyone who had paid the tax already, ahead of the 15 December deadline, would be reimbursed. There are ongoing discussions about paying a contribution towards local business training programmes.

While the decision has been welcomed by auto-entrepreneurs, it is regrettable that a basic form of self-employment has become so complicated in the hands of French bureaucrats.

The French discussion forum http://www.auto-entrepreneur.fr/ is an excellent source of information about the auto-entrepreneur regime, including the new EIRL** version available from January 2011, which offers an element of limited liability, similar to a company, for the individual auto-entrepreneur, by separating (and protecting) personal assets from those of the enterprise.

(*'cotisation foncière des entreprises')  (**'entreprise individuelle à responsabilité limitée')

Selling your French home - description!

In a recent case involving the private sale of a French apartment, the English owners offered the property 'as is' but included in the asking price certain items (refrigerator, microwave, beds etc) plus certain others that were offered separately, at a price to be negotiated. The property details included two lists - items that were included in the asking price, and the items offered separately.

An offer was received from a French couple, who intended marketng the apartment as a summer rental, and accepted by the owners. As they approached the preparation of the compromis de vente (pre-contract) the French buyers insisted that the apartment was offered 'fully furnished' and that their offer was based on that. No amount of discussion could convince them that the printed details, of which they had a copy, clearly noted which items were included and which were not. It took considerable negotiation to finally reach an agreement, the owners reluctantly conceding all but a few items they wished to retain, in the interests of concluding the deal and moving on.

Could the property details have been clearer? Perhaps with hindsight one could use the French word vide, to emphasise that the apartment was offered empty. This term however does need clarification and agreement between the parties, as it does not normally imply that the vendor can strip out fittings such as kitchen units, bathroom cabinets etc which are expected to be left behind.

However, in all situations, it seems advisable to list and agree the items that will be left behind, and those that the vendors wish to retain. Some of the latter could of course be offered for sale at a price to be agreed.

Home DIY when you come to sell

When the times comes to sell your French property, DIY renovations carried out by owners are generally not popular with French buyers, who prefer to see work undertaken and guaranteed by qualified artisans.

A recent French court decision may now alter the legal responsibility of owner/vendors for work they have undertaken themselves. The appeal court has used the argument that an owner who does building work on his own property automatically becomes a "builder" - and as a result is subject to the same laws requring a 10 year guarantee on the work done, that is applicable to registered artisans (who are obliged to carry the requisite insurance cover).

The court case cited a vendor who had re-covered the outside of the property in question, but the work had proved defective. The new owners sued for damages and won, despite the arguments of the previous owner that he was merely the seller and not a builder. The court ruled otherwise.

How far this ruling will affect current legislation or lead to the introduction of new rules covering DIY renovations is unclear. French jurisprudence does not carry the wame weight as in British law, where previous judgements can be cited in subsequent cases. However, a vendor doing renovation, repair or rebuilding work on his own property should be aware of the potential risks following the French court ruling.

(Source: Europe 1)

Opening a French bank account

Opening a French bank account is relatively simple, but can be the subject of frustrating delays which appear inexplicable to the client. In the interests of preventing money laundering (the reason usually given), increasing amounts of doculmentation are asked for, to prove that you are who you say you are. If you are not living and working fulltime in France, or receiving pension payments, the French bank may require proof of your non-French resources, such as salary slips, and/or UK bank statements.

All this can take several weeks, as new accounts are eventually approved by the Banque de France, meanwhile the client has no way of paying French bills - for utilities, suppliers, artisans etc - other than in cash (only allowed for small amounts) or bank to bank transfers from his home bank. It is not uncommon for utilities to be cut off without warning as a result of non-payment of the initial bill when moving into a French property.

Regular bills, such as those for electricity, gas, telephone etc can be paid by standing orders ('prélèvements') and the first bills received usually include a form to complete and return to the supplier, which will be passed in turn to your French bank, once the account has been opened.

In view of the delays associated with opening a French bank account and its sometimes annoying consequences, we advise clients to set up a French bank account well ahead of the intended completion/occupation date of any property purchase, allowing at least two months - which is normally the time allowed for completing a French property purchase from initial offer to final contract.

Rise in French property transactions 2010

According to a report published earlier this month by the French estate agents' body FNAIM, property transactions during 2010 are likely to reach 700,000 - and by mid-year had already exceeded 650,000, representing an 18% growth over 2009.

These are encouraging figures after the decline in the number of transactions to less than 600,000 in 2008/2009, which had been preceded by six years (2003 - 2008) when the number of transactions exceeded 800,000 annually.

Buying to let - caution!

Last night's Capital (M6) programme emphasised once again extreme care needed when buying an apartment intended for letting, particularly under recent government tax saving schemes such as the 'loi Scellier'. Under this scheme, monthly repayments of, say, 1200 euros can be reduced to around 400 euros, after taking into account income tax saved and income from rentals, encouraging many French investors to put their money into bricks and mortar.

The programme looked at two examples, a typical commuter town 15 kms from Paris and the city of Bergerac. In the first case, the development turned out to involve hundreds of apartments, located not 10 minutes but nearly 45 from the rail station, in an area of over-supply and lacking public transport. Much the same situation was apparent in Bergerac, where despit the promises of developers, the majority of apartments were un-let - due again to poor location and over supply according to local estate agents interviewed.

Even though the developers promised a guarantee against failure to find a tenant, in practice this lasted for only 12 months. And when desperate owners tried to sell, they found that their apartment was over-priced, and that after one year without tenants (and rental income), the tax advantages were cancelled. One owners found himself paying over a 1000 euros a month for an apartment he did not occupy, which remained un-tenanted and which he could not sell.

Surprisingly, less than half of buyers bother to visit the site or the area where they are being urged to invest an average of 200,000 euros, to check the quality and location of the property, and to find out for themselves whether a rental market actually exists. A government official interviewed admitted that the criteria for selection of projects under the Scellier scheme  were being revised to include an asessment of rental potential, but the new rules would not apply before 2012.

Curiously, France currently has an estimated immediate need for over 1 million new homes.